Indemnity Under a Debt Servicing Standing Charges Policy6 September 2017 | Insurance Issues
Whether an insurer was required to indemnify an insured under a Debt Servicing Standing Charges Insurance Policy in respect of delay caused by insured damage, including a discussion on Jones v Dunkel inferences and s57 of the Insurance Contracts Act 1984 (Cth).
- Whether insurers were required to indemnify an insured under a Debt Servicing Standing Charges Insurance Policy in respect of delay caused by insured damage
- Whether a Jones v Dunkel inference was available
- Whether interest was payable under s57 ICA
The insured plaintiffs operated two sugar refineries in New South Wales. They engaged Downer Energy Systems Pty Ltd and Clyde Babcock – Hitachi (Australia) Pty Ltd pursuant to an Engineer Procure and Construct Contract to, inter alia, construct a plant at each refinery to generate electricity using biomass from refinery operations (the Project).
The Project was financed by a syndicate of lenders pursuant to a Finance Agreement. One of the policies of insurance effected by the plaintiffs for the purposes of the Project was a “Debt Servicing Standing Charges Insurance Policy” (DSSC Policy) which covered payments for debt servicing and charges during project delays. The DSSC Policy was underwritten by the defendant underwriters (Insurer).
A claim on the DSSC Policy arose out of the failure of a steam turbine generator (STG) at one of the plants on 8 May 2008 which led to the STG having to be recommissioned.
At the time of the failure it was hoped that works would be completed by June 2008, however, by reason of the failure of the STG, practical completion was not achieved until 21 November 2008.
The primary question for determination was whether there was ‘Delay’ as defined that would trigger the DSSC Policy and, accordingly, whether and to what extent the plaintiffs were entitled to indemnity.
The insuring clause of the DSSC Policy relevantly provided:
“In the event of Damage to the Project… resulting in a Delay, the insurers will, subject to the terms, exclusions, memoranda, conditions, extensions, definitions and other provisions of this Policy, pay to the insured the amount of the Debt Servicing Standard Charges during the period of Delay.”
It was common ground at trial that in order to demonstrate that the DSSC Policy responded the insured needed to establish the fact of and extent of delay.
The insured plaintiffs contended that the period of delay was 96 days. The Insurer disputed the fact of the delay and pointed to the fact that there were problems with the Project apart from the failed STG.
Based upon the unique facts of the case, the plaintiffs satisfied the court that had the damage within the meaning of the Policy not occurred, the works would have been completed at least 93 days before the date of actual completion. Accordingly, delay within the meaning of the DSSC Policy had occurred, and the plaintiffs were entitled to indemnity.
In the course of submission, the Insurer sought to have adverse inferences drawn by the court by reason of the plaintiffs’ failure to call evidence from certain witnesses. The court noted that the Insurer faced the difficulty that the events in question took place more than 8 years prior to the trial. The court noted that the basis for the drawing of an inference degrades over time. The court could not necessarily expect witnesses to remember details of the sort of evidence that insurers thought should have been led so long after the relevant events, and rejected the Insurer’s argument that a Jones v Dunkel inference ought to be drawn.
An ancillary issue arose about the amount of interest payable pursuant to s57 of the ICA, which required consideration of when it became unreasonable for the Insurer to resist the claim. On the evidence, a formal claim was only made on the DSSC Policy in July 2014. The Insurer wrote to the plaintiffs on 24 December 2014 declining the claim on the basis that there was insufficient evidence. The court noted that the Insurer was entitled to ask for further information if it wished. Had it done so and had the plaintiffs commenced proceedings without supplying the information, the Insurer’s conduct might well have been reasonable. In the circumstances, the court held that the declinature of indemnity was unreasonable and the plaintiffs were entitled to interest on their claim pursuant to s57 from the date of the declinature on 24 December 2014.
Implications for you
The court’s discussion on Jones v Dunkel indicates that where certain events take place many years prior to trial it is not necessarily unreasonable to expect that a witness will not remember key events, such that a failure to lead evidence from a witness on a particular topic will not attract an adverse inference.
Additionally, on interest, the decision suggests that had the insurer’s position on indemnity been reserved pending the provision of further information, rather than simply declining indemnity, s57 may not have been triggered.